By Marcus Bensasson

The prolonged campaign season is worsening Greece’s chronic difficulties with tax evasion that has helped wreak havoc on the country’s finances.

Greece, which Bank of America Merrill Lynch says may run out of money in early July, fell short of revenue goals by 495 million euros ($615 million) in the first four months of 2012, according to the Finance Ministry. Tax collections dropped 20 percent during the first 20 days of May from the same year- earlier period, Kathimerini newspaper reported May 25, without saying where it got the information.

After the June 17 election, the so-called troika -- the European Commission, European Central Bank and International Monetary Fund -- will “almost certainly find that Greece has slipped far behind targets in May and June,” Holger Schmieding, chief economist at Berenberg Bank, said in an e-mail. “If Greece gets a cooperative government, the troika will likely recalibrate the program for Greece to take account of the new starting position for the new government.”

Greece is preparing for its second national election in six weeks, a vote that may determine whether the country stays in the 17-nation euro. The inconclusive May 6 ballot showed gains for parties, led by Syriza, that oppose terms of the country’s bailouts from the European Union and the IMF.

The Athens Stock Exchange (ASE) index has fallen 26 percent since May 6 and the euro has weakened 4.8 percent against the dollar. The yield on its 2 percent bond due in 2023 was down 83 basis points at 29.7 percent at 10 a.m. today Athens time.

Election Effect

Tax evasion increases by an average 0.2 percent of annual gross domestic product in periods around Greek elections, as the bureaucracy that relies heavily on day-to-day control by politicians slows and tax collectors perform fewer audits, according to a study published last year by Spyros Skouras and Nicos Christodoulakis, a former finance minister, from the Athens University of Economics and Business. The study looked at 13 elections between 1974 and 2009.

“I don’t think anything has changed in essence in how the public sector works in the last two years,” Skouras said in an interview. “People respond to incentives, and when they know the likelihood of being punished for tax evasion is low, they will evade more.”

The European Financial Stability Facility confirmed May 9 that a total of 5.2 billion euros will be released to Greece by the end of June. Of that, Greece received 4.2 billion euros last month to repay funds to the ECB. The remaining 1 billion euros is to be paid depending on the country’s financing needs.

Even if a government emerges from Greece’s parliamentary elections on June 17, its first challenge will be fixing the damage caused by the campaign.

National Duty

Since last month’s appointment, Greece’s caretaker Finance Minister Giorgios Zanias has held meetings with the heads of tax offices to urge them to step up collection.

“It is a national duty to pay taxes,” he told reporters on May 21 after a visit to the offices of the financial crimes squad in Athens. Revenue collection would be his top priority as finance minister, he said.

IMF Managing Director Christine Lagarde caused an outcry in Greece after she said in an interview with London’s Guardian newspaper that many in the country were “trying to escape tax all the time.”

The specter of a return of the drachma may be dissuading some debtors from paying taxes in euros that they might be able to pay in drachma if they wait, according to Skouras.

Deficit Targets

Under the country’s bailout program, it has to reduce its budget deficit to 7.3 percent of GDP this year from 9.3 percent in 2011, and cut its primary deficit, which excludes interest payments, to 1 percent from 2.4 percent. Greece sparked Europe’s sovereign debt crisis in 2009 after saying its deficit was bigger than previously thought, reaching a euro region record of 15.8 percent of GDP that year.

While revenue collection was behind estimates before May, the central government beat the overall deficit target for the period by 1.9 billion euros, which bodes well for its ability to recover from revenue slippages, according to EFG Eurobank Ergasias SA (EUROB) Chief Economist Platon Monokroussos.

“Unless we have a significantly quicker pace of GDP contraction in 2012 or prolonged political uncertainty following the elections, effectively an inability of the political parties to create a new government, then I think this slippage can to a good degree be covered in the second half of the year,” Monokroussos said.

While combating tax evasion represents the most pressing problem in realizing the country’s budget targets, in the long- run the country needs to return to growth for revenues to recover, according to Yannos Papantoniou, a former finance minister from the socialist Pasok party.

“The problem is not easily solvable,” he said. “It will represent one of the major challenges for the government that will emerge after the June 17 elections.”

[Bloomberg]